The plunge in UK car finance will make the Bank of England nervous
This week has brought another example of part of the famous Abraham Lincoln phrase when he pointed out that you can fool some of the people all of the time. This is the financial media and in this instance Reuters who on Monday told us this.
A six-month delay to Brexit gives Britain’s central bankers space to take a broader view of the economy this week, but persistent uncertainty over leaving the European Union makes them unlikely to raise interest rates any time soon.
There are various issues with this including the fact that in a month’s time it will be five years since Governor Carney gave us this Forward Guidance.
There’s already great speculation about the exact timing of the first rate hike and this decision is becoming more balanced. It could happen sooner than markets currently expect.
In the coded language of central bankers that was seen as not only a green light but a double green. Yet he did nothing for two years before then cutting interest-rates in August 2016 and of course promising another cut in November of that year. Net he has managed a 0.25% rise to 0.75% in the six years of his tenure yet the financial media still write articles as if he is itching to raise interest-rates as he did not back in the days when Brexit seemed unlikely, to him anyway.
Last night was especially unkind to the Reuters views as the man [Trump] who has tightened his grip on US monetary policy gave us his view.
Our Federal Reserve has incessantly lifted interest rates, even though inflation is very low, and instituted a very big dose of quantitative tightening. We have the potential to go ….up like a rocket if we did some lowering of rates, like one point, and some quantitative easing.
So there you have it President Trump would like US interest-rates 1% lower ( as well as more QE to help finance his fiscal deficit) and the story of the last six months or so is that he has got what he wants. I doubt he will get it tonight at the Federal Reserve announcement but the sands feel like they are shifting.
House Prices
This is something else confirming my theme of today as we note this from the Nationwide.
UK house price growth remained subdued in April, with prices just 0.9% higher than the same month last year….Prices rose 0.4% month-on-month, after taking account of seasonal factors
So there is not much of a spring boost going on here. The Nationwide does a sterling job in spinning the line that houses are affordable to first-time buyers but even it has to admit this.
The exception is in London and parts of the south of England where affordability pressures are more acute, and the monthly cost of servicing a mortgage, as well as raising a deposit, poses a greater challenge.
It is London that has pulled down the rate of house price growth and let me welcome the fact that whilst there are many different micro markets overall we now have real wage growth of around 2% per annum.
The Bank of England thinks differently and this is highlighted by the Nationwide chart which shows the average house price being around £160,000 in April 2013 as opposed to £214,920 now. That ladies and gentlemen has been the effect of its Funding for Lending Scheme which it argued reduced mortgage rates by around 2%. Of course we can never look at anything in outright isolation but it was a big player and the stopping of the rises will not be good news for any researcher there explaining this to Governor Carney.
Anyway it would appear that mortgage providers are ignoring the Forward Guidance rhetoric too. From MoneySavingExpert.com.
On top of that, there’s currently fierce mortgage competition, so the cheapest 5yr fixed-rate mortgage is 1.79%, which is seriously cheap, and 2yr fixes are as low as 1.39%.
As ever, the Nationwide numbers are flawed as they only cover its customer base but they do add to our total database.
Car Finance
This is an area which regularly concerns us and the quote below from the UK Financing & Leasing Association shows why.
In 2018, members provided £46 billion of new finance to help households and businesses purchase cars. Over 91% of all private new car registrations in the UK were financed by FLA members.
That amount continues to rise as I recall it being 86% not so long ago. So if you purchase your car outright you are now a rarity. Also this gives us a direct link between credit and what most regard as unsecured credit ( Governor Carney argues it is secured) and the real economy.
The Bank of England is usually reticent about its data on this subject ( I have asked….) but look at this from earlier.
The fall in net lending on the month was due to weaker net borrowing for other loans and advances, which fell from £0.8 billion in February to £0.2 billion. Within this, new borrowing for car finance fell sharply, alongside weaker car registration numbers in March 2019 than in previous years.
If we stay with unsecured finance the impact was as follows.
The extra amount borrowed by consumers to buy goods and services fell to £0.5 billion in March (Chart 1). This was the lowest monthly flow since November 2013 and well below the average of £0.9 billion since July 2018……The annual growth rate of consumer credit has continued to slow, reflecting the relatively weak flows of consumer credit over the past twelve-months. It fell to 6.4% in March, well below its peak of 10.9% in November 2016.
As you can see some context is needed as that overall rate of growth is still around double the rate of growth of wages and around quadruple economic growth. But as we have expected car finance has changed from being the engine for this to a brake on it.
Is anybody still expecting a Bank of England interest-rate increase?
Business Lending
This is rather eloquent as I remind you that the Funding for Lending Scheme was supposed to boost this.
Annual growth in lending to SME’s remains weak at -0.1%.
Six years of economic growth as well has made little or no difference as opposed to mortgage lending.
The annual growth rate of mortgage lending was 3.3%. It has been around 3% since the beginning of 2016,
Actually the Bank of England thinks that the latter is “modest” so I dread what it really thinks of lending to smaller businesses.
Comment
Those believing the Forward Guidance mantra have three main problems from today’s data if we look at things from the Bank of England’s point of view. Firstly there are few wealth effects from house price inflation fading to less than 1%. Next there is the sharp slow down in car finance and what that implies. Thirdly there is this from the Markit Manufacturing PMI.
The headline seasonally adjusted IHS Markit/CIPS Purchasing Managers’ Index® (PMI®) fell to 53.1 in April, down from March’s 13-month high of 55.1. Alongside weaker growth in production, new orders and stocks of purchases, the lower PMI level also reflected job losses in the sector.
Actually this number worked beautifully with the estimate that stockpiling had raised the index by 2.0. But care is needed as the Bank of England does not think like that and is presumably now afraid of further falls. None of that suggests an interest-rate rise and nor does the rate of economic growth and of course inflation is below target.
Moving onto the money supply data it is hard to read on a couple of counts. Sadly the Bank of England in another mistake stopped publishing narrow money data some years back. All we have is broad money and that looks like it is improving a little. I say looks like because the Gilt Market has two big flows in March. The Operation Twist style QE I have been reporting on added £9 billion but a large Gilt matured ( £36 billion) and will have sucked much more out. Thus I think we should focus on M4 lending at 3.7% that the total M4 growth at 2.2% but we will only really know when we get the April and May data and the maturity gets replaced.
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